Now or Later

By Karen Rutzick

April 20, 2006

Money invested in the Thrift Savings Plan is tax-free at the outset, saving federal employees who contribute to the government's 401(k)-style retirement plan money during their working years. But when employees retire and begin to withdraw savings from the TSP, the money is taxed.

Congress devised another option for private investors, however: the Roth 401(k) plan. The opposite of traditional 401(k)'s, Roth plans tax investments initially, but not when participants withdraw their retirement dollars years later.

Roth plans can save investors money because any earnings accumulated from the funds are tax-free. The option can be especially attractive for younger investors, who likely fall in a much lower tax bracket now than they will when they retire.

Currently there is no Roth TSP option. Congress would have to give the TSP specific authority to create one, and so far, no such bill has been conceived or introduced.

What's more, the TSP board is opposed to creating a Roth option, at least for now. Its central concern is the administrative cost of adding a separate type of retirement plan. The TSP, which has the lowest managerial costs of any 401(k) plan by a stretch, prides itself on keeping administrative expenses to a minimum.

In a statement published on its Web site explaining TSP's lack of a Roth option, the board reminded participants that the cost would detract from their investments.

"It would entail an enormous effort to overhaul our systems and communications materials, implement an after-tax retirement savings program in addition to our current pretax program and educate 3.5 million participants about how to choose wisely between the two approaches," board members said.

Agency payroll systems would have to be updated as well, they said.

But those arguments have not deterred some members of the federal employee community. In late March, Leonidas Mecham, secretary of the Judicial Conference of the United States, a congressionally created group that oversees court policy for federal judges, wrote to Gary Amelio, executive director of the TSP, outlining the advantages to adding a Roth option.

Mecham noted that Roth 401(k)'s have a $15,000 annual contribution limit, whereas Individual Retirement Accounts with a Roth option have a $5,000 ceiling. An additional $10,000 a year of after-tax contributions would benefit federal employees, he said.

Mecham also zeroed in on the Roth plans' benefits to employees whose incomes are likely to rise significantly before retirement, increasing their tax burden, and on their ability to diversify tax exposure by investing in both Roth and traditional TSP plans.

He also rejected the board's reasoning on administrative costs and the educational hurdle.

"While the judicial conference understands that the establishment of a Roth TSP option could be administratively burdensome, it would be unfair to deny judges and employees such a potentially valuable benefit for that reason alone," Mecham said. "Federal employees are a well-educated and sophisticated group…there is no reason to believe that they could not choose wisely between the Roth and traditional TSP options."

Mecham also told Amelio that "it is only fair" that federal employees have the same opportunity to invest in a Roth 401(k) as everyone else.

In his reply, however, Amelio pointed out that with the authority Congress granted for Roth 401(k)'s in private sector plans set to expire in 2011, private providers have been slow to add the option.